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Stagflation Nation?

According to Wikipedia (yes, consider the source)…. here is the definition of Stagflation:

In economics, stagflation is a situation in which the inflation rate is high and the economic growth rate slows down and unemployment remains steadily high.

Well, under Barack Obama’s economic policies passed by the Democrat-controlled Congress from 2009-10…. we at least have two of those three.  And inflation is higher than most of us have been used to since at least the 1990s.

Bob Krumm says the USA is now Stag-Nation.

This is what a stagnant economy looks like.  The gain of 115,000 jobs is less than enough to keep up with population increases, and was below the median economic forecast for April.  The only reason that the unemployment rate “fell” to 8.1% is because the labor force participation rate keeps dropping.  If you stop looking for work, you aren’t unemployed.  But you’re not employed either.  You’re just “missing.”  You don’t count.

Welcome to the country we now live in:  the Stag-Nation.

And this from the bloggers at ZeroHedge:

It is just getting sad now. In April the number of people not in the labor force rose by a whopping 522,000 from 87,897,000 to
88,419,000.  This is the highest on record. The flip side, and the reason why the unemployment dropped to 8.1% is that the labor force participation rate just dipped to a new 30 year low of 64.3%.

GP Ed Note: My post yesterday about the “invisible 86 Million” is now dramatically out of date…

Here are the official FedGov numbers:

Nonfarm payroll employment rose by 115,000 in April, and the unemployment rate was little changed at 8.1 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in professional and business services, retail trade, and health care, but declined in transportation and warehousing.

Household Survey Data

Both the number of unemployed persons (12.5 million) and the unemployment rate (8.1 percent) changed little in April.

Among the major worker groups, the unemployment rates for adult men (7.5 percent), adult women (7.4 percent), teenagers (24.9 percent), whites (7.4 percent), and Hispanics (10.3 percent) showed little or no change in April, while the rate for blacks (13.0 percent) declined over the month. The jobless rate for Asians was 5.2 percent in April (not seasonally adjusted), little changed from a year earlier.

The number of long-term unemployed (those jobless for 27 weeks and over) was little changed at 5.1 million in April. These individuals made up 41.3 percent of the unemployed. Over the year, the number of long-term unemployedhas fallen by 759,000.

The civilian labor force participation rate declined in April to 63.6 percent, while the employment-population ratio, at 58.4 percent, changed little.

Whether Obama & his team studied Martian or Marxist Applied Economics, one thing is clear: They didn’t learn any lessons from the unprecedented US economic expansion that resulted in the 1981-83 economic policies pushed through a Democrat Congress by Ronald Reagan.

-Bruce (GayPatriot)

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48 Comments

  1. To all Obamanauts and economics poseurs on the John Maynard Keynes Express:

    Please report here all the actions that Obama took that kept this crash from being worse and just how those actions did that.

    Then, please report here why Obama did not double down on his miracle cure and snap us out of the decline and stagflation and send us rocketing back to prosperity.

    Finally, how is bigger government and more social welfare the panacea for reigning in the deficit and balancing the books on unfunded and underfunded social welfare programs as all the while the interest on the national debt is taking an ever greater portion of the federal budget (as if there is one) and the GNP.

    [Just for the record: I opposed TARP, Paulson and the GMC and Chrysler bail outs and turning the recovery over to Goldman Sachs and installing all the usual suspects in Goldman Sachs to manage the government side of the equation.]

    [For the further record: George Bush, John McCain and Barack Obama are equal in their fumbling ignorance when it comes to "saving the economy" and taking correct actions to stem the crisis.]

    Comment by heliotrope — May 4, 2012 @ 11:43 am - May 4, 2012

  2. I’ll go out on a limb here, heliotrope, and say that your favorite president was Calvin Coolidge? HE knew what to do and what NOT to do in terms of government policy during a recession.

    Comment by Bastiat Fan — May 4, 2012 @ 11:48 am - May 4, 2012

  3. My favorate president was Harding. At the end of Wilson’s administration the Country was in a deep depression. After 3 years with Harding the unemployment rate was around 3pc and our Country was on the road to the ‘good ole days’.

    Comment by John R — May 4, 2012 @ 12:52 pm - May 4, 2012

  4. Helio-

    I’ve been in touch with some of the Obama apologists on our blog… I have their answer to your simple questions:

    “Mitt Romney railroaded his gay spokesman!”

    Comment by Bruce (GayPatriot) — May 4, 2012 @ 2:02 pm - May 4, 2012

  5. Yep! That would be about the sum of it.

    Comment by heliotrope — May 4, 2012 @ 2:34 pm - May 4, 2012

  6. I’ll go out on a limb here, heliotrope, and say that your favorite president was Calvin Coolidge?

    Calvin Coolidge was awesome! He was my favourite president…

    Comment by Rattlesnake — May 4, 2012 @ 3:28 pm - May 4, 2012

  7. Don’t expect to build up the weak by pulling down the strong.

    —Calvin Coolidge

    Comment by heliotrope — May 4, 2012 @ 3:53 pm - May 4, 2012

  8. “And inflation is higher than most of us have been used to since at least the 1990s.”
    Actually, not so:
    http://inflationdata.com/inflation/inflation_rate/currentinflation.asp

    Comment by rt — May 4, 2012 @ 4:11 pm - May 4, 2012

  9. The policies pushed through by Reagan included a sharp jump in federal nondefense spending, and levels of deficit spending higher than any since 1946.

    Comment by rt — May 4, 2012 @ 4:14 pm - May 4, 2012

  10. Actually, YES so: http://www.shadowstats.com/alternate_data/inflation-charts

    Over the last 25 years, the government has progressively (so to speak) manipulated the inflation statistics to hide the problem. But by all means, rt, keep drinking the government’s Kool-Aid.

    The policies pushed through by Reagan included a sharp jump in federal nondefense spending

    Wrong again. Reagan slowed the growth of nondefense spending significantly: http://www.cato-at-liberty.org/presidential-spending/

    Comment by ILoveCapitalism — May 4, 2012 @ 4:26 pm - May 4, 2012

  11. and levels of deficit spending higher than any since 1946

    Which was admittedly a problem; the economy would have done that much better, if Reagan (or actually, the Democratic Congress – not Reagan) had not done that.

    But fortunately the benefits from Reagan’s improvements to the tax code (cuts in marginal rates) and from Volcker’s high interest rates were huge enough to overcome the drag represented by those deficits. And the rest, as they say, is history.

    Comment by ILoveCapitalism — May 4, 2012 @ 4:29 pm - May 4, 2012

  12. Now for what I came to say. Our crisis today is caused by these problems:

    1) Too much debt.
    2) Too much government.
    3) Too low interest rates.
    4) Too many bailouts. (I include ALL forms of welfare or government “assistance” here along with TARP, etc.)

    They form an inter-related complex. For example, the “bad” debt (the debt that was taken on for wasteful and unproductive uses, like the housing bubble, or government spending, or the majority of student loans) must be written off before the economy can really grow again; but the too-low interest rates serve to keep it around. The too-big government is financed by the too-low interest rates, and it directs too much economic resource to the various forms of bailout. And so on.

    So what’s Obama’s solution? More debt, more government, more too-low interest rates and more of the various forms of bailout. Natch.

    Albert Einstein is usually credited with these quotes:

    Insanity: doing the same thing over and over again and expecting different results.

    We cannot solve our problems with the same thinking we used when we created them.

    Any intelligent fool can make things [ed: like government] bigger and more complex… It takes a touch of genius – and a lot of courage to move in the opposite direction.

    Whether Einstein really said them or not, Obama would do best to heed them. (And he won’t, natch.)

    Comment by ILoveCapitalism — May 4, 2012 @ 4:44 pm - May 4, 2012

  13. Hi ILC,

    I appreciate the offer, but Kool-Aid’s too high in sugar for me. Thanks for the inflation link. The chart there shows that even by the alternate method, the current inflation rate was equaled a number of times in the past decade, contra Bruce’s assertion.

    Thanks also for the link to the Cato Institute. Very interesting. The data there, however,lumps together all eight of Reagan’s years, while Bruce is speaking specifically of Reagan’s 1981-1983 policies, and in those years, federal non-defense spending did increase dramatically (sorry, should have provided the link in my original post:
    http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=1&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Qtr&FirstYear=1980&LastYear=1987&Update=Update&JavaBox=no#Mid

    I should correct myself: if you look at those numbers carefully, you’ll see that federal defense spending did shrink until the first half of 1982, and you can see the impact on GDP for each quarter that followed. Federal nondefense spending started going up quickly in the second half of 1982, and GDP started shooting up soon afterward.

    Comment by rt — May 4, 2012 @ 4:45 pm - May 4, 2012

  14. ILC, I’d enjoy hearing more about the impact of cutting the marginal tax rates, which can be considered a supply-side policy (boosting the job creators) OR a Keynesian policy (boosting consumer spending).

    In the meantime, I’d like to point out that the Reagan recovery was a standard Keynesian recovery, in that consumer spending led the recovery, and increases in investment spending occurred well after consumption and GDP had recovered (a you can see in data I linked to above).

    Comment by rt — May 4, 2012 @ 4:49 pm - May 4, 2012

  15. Oops, in comment 13, I meant, ” you’ll see that federal nondefense spending did shrink until the first half of 1982…”

    Comment by rt — May 4, 2012 @ 4:57 pm - May 4, 2012

  16. The chart there shows that even by the alternate method, the current inflation rate was equaled a number of times in the past decade, contra Bruce’s assertion.

    Nope. Either you didn’t read the chart correctly, or you didn’t read Bruce’s assertion correctly. To review, Bruce said this:

    inflation is higher than most of us have been used to since at least the 1990s.

    Now look at the second chart – the one that shows inflation since the 1980s, and calculated by the 1980 method. It shows inflation running presently around 10% per year. (Again, this is by the 1980 method, the method that was the source of all those inflation headlines under Jimmuh Carter.)

    Now, the chart does show 2008 inflation spiking even higher than that… but, quickly compensated for in 2009 by a plunge. The chart’s 10% inflation rate for today is higher than the inflation seen in the 1990s and most of the 2000s, what “most of us have been used to since…” Thus, Bruce’s assertion was essentially correct.

    Comment by ILoveCapitalism — May 4, 2012 @ 5:00 pm - May 4, 2012

  17. ILC, I see the chart hitting 10% or higher from (it’s hard to be exact without vertical grid lines) about 2005 to mid 2008, with a very brief dip sometime in mid 2006. So I don’t see the accuracy in saying “inflation is higher than most of us have been used to since at least the 1990s.”

    Comment by rt — May 4, 2012 @ 5:09 pm - May 4, 2012

  18. the Reagan recovery was a standard Keynesian recovery

    There is no “standard Keynesian recovery.”

    Keynesianism doesn’t produce recoveries. There is no historical instance of Keynesian so-called “stimulus” policies producing an economic recovery by themselves, that is, without being combined with some other more sensible policies that were in fact the real author of the recovery. In Reagan’s case, the fact that he and Volcker provided people with good reasons to work, save and invest again (namely the lower marginal tax rates, and the higher interest rates) caused the recovery.

    The deficits that the Democratic Congress forced Reagan to run were, if anything, a drag on the economy. To Bruce’s original point: Keynesianism is rife with errors, an almost totally false doctrine. The real economy is what people produce and trade, with money as a mere a means of exchange and accounting. Higher spending of money cannot, in and of itself, stimulate an economy except temporarily or in the short run, like a temporary “sugar high” replete with bad effects to follow. Production and trade come from people choosing to get to work; people choosing to get to work comes from people being allowed to keep more of what they earn (i.e., lower marginal tax rates) and being allowed to benefit from what they save/invest (i.e., interest rates above the rate of inflation).

    Comment by ILoveCapitalism — May 4, 2012 @ 5:12 pm - May 4, 2012

  19. But ILC, investment lagged the recovery; it did not lead it.

    Comment by rt — May 4, 2012 @ 5:17 pm - May 4, 2012

  20. investment lagged the recovery

    … according to your embedded Keynesian assumption that *the level of spending alone* is what counts.

    But the level of spending is not what counts. The quality of spending is what counts. Unfortunately that is difficult to capture (and even if it were easy, our Keynesian statisticians would not want to capture it). But the fact is, not all investment is created equal. There is such a thing as ‘malinvestment’: spending that is called ‘investment’ by Obama or by the local business fraud or whomever, but that is actually an unproductive waste of economic resources.

    The problem with low interest rates is that they don’t stimulate good investment; they stimulate malinvestment. In an environment of reasonable interest rates (i.e., rates that are at least a couple of point ahead of inflation), borrowers must work harder to justify their borrowing and hence, their spending. They have to ‘cut the B.S.’, so to speak. That leads to a much better economy, i.e. one that is more genuinely productive, with higher real growth and higher physical living standards.

    Comment by ILoveCapitalism — May 4, 2012 @ 5:41 pm - May 4, 2012

  21. (continued) Most of what goes on in the U.S. economy today, under Bernanke’s 0% interest rates, is malinvestment. Just as the housing bubble was, under Greenspan’s 1% interest rates. That waste of economic resources is part of why the economy *can’t* recover. (Obama’s general war on production and trade is another part; his and Bernanke’s refusal to let failures fail and let bad debts be cleared out is another part; see comment #12.)

    Comment by ILoveCapitalism — May 4, 2012 @ 5:45 pm - May 4, 2012

  22. ILC, you seem to be suggesting that there is no data out there good enough to lend support to any theory, so we’ll just have to leave it at that.

    In the meantime, I haven’t seen anything indicating that I was unfair to Bruce on his inflation assertion, or any reason to doubt that Reagan’s recovery was preceded by a jump in federal non-defense spending, with investment lagging a few quarters behind.

    It’s been fun, though, in both the content and the tone. Thanks. :)

    Comment by rt — May 4, 2012 @ 6:00 pm - May 4, 2012

  23. Here’s the definition of “not in labor force” from the Labor Dept: Persons who are neither employed nor unemployed are not in the labor force. This category includes retired persons, students, those taking care of children or other family members, and others who are neither working nor seeking work.

    So the big, scary number includes retires (growing number as boomers retire), stay-at-home parents, etc.

    Comment by SoCalRobert — May 4, 2012 @ 6:13 pm - May 4, 2012

  24. I’m just hoping for gas prices to rise this summer, causing the GDP to fall below 2% growth a quarter. This will give a needed unemployment boost to His Majesty on January 20th. But if Romney is elected, it will be a chaotic four years as no one can likely turn this country around. Hello Greece and the rest of western Europe in the USA about 2016.

    Comment by davinci — May 4, 2012 @ 7:33 pm - May 4, 2012

  25. The Labor Dept lists the retires as retired and not counted as unemployed. But they are unemplyed bacause many of them retired early and now with the huge inflation of the last several years they are out looking for work but no jobs.

    I retired at 62 with a company retirement and SS which in its self was plenty for me to retire on. Now it would only pay my taxes. I would have to sell my home and look for a job which is what many of the early retirees are doing. They should be listed by the Labor Dept. as UNEMPLOYED.

    d

    Comment by John R — May 4, 2012 @ 8:15 pm - May 4, 2012

  26. In the meantime, I haven’t seen anything indicating that I was [anything but 100% right...]

    Of course you haven’t, Cas. We’ve been over this before. Nothing reaches you. I don’t care, though. When I write, it’s for others (than you).

    Comment by ILoveCapitalism — May 4, 2012 @ 9:45 pm - May 4, 2012

  27. if Romney is elected, it will be a chaotic four years as no one can likely turn this country around. Hello Greece and the rest of western Europe in the USA about 2016.

    Agreed. What we’re going through (see #12) is the result of 80+ years of Big Government. Since Obama and the Democrats are the prime proponents of that philosophy, they should inherit the blame for what is to come. The danger of electing a Republican this year is that they won’t: they’ll blame it all just on Romney, and he will (quite possibly) be unequal to the task of defending capitalism and explaining the real issues to Americans.

    Comment by ILoveCapitalism — May 4, 2012 @ 9:51 pm - May 4, 2012

  28. What the heck, ILC? In the first place, I’m not Cas. In the second place, we were having a perfectly nice exchange.

    Comment by rt — May 4, 2012 @ 10:08 pm - May 4, 2012

  29. OK. Sorry for noticing certain similarities. (Example: she also does not acknowledge the concept of malinvestment, and the role that Fed-/government-inspired malinvestment plays in the so-called business cycle.)

    Comment by ILoveCapitalism — May 4, 2012 @ 10:59 pm - May 4, 2012

  30. ILC, it’s not that I don’t acknowledge the concept of malinvestment. It makes good conceptual sense, and you could even add the concept of “malconsumption,” as government-induced low interest rates cause people to borrow rather than save, distorting the relationship between current and future consumption. This would support the idea of a government-induced business cycle, as people binge on consumption and are then forced to pull back (or go bankrupt)

    No, the problem I have is that you haven’t established that malinvestment in 1981-1983 is a relevant factor, one that distorts my interpretation of the numbers — and you’ve even said there’s no data available to evaluate that hypothesis. So, no, I can’t say I’ve seen any evidence to change my view.

    In fact, since you’ve praised the interest rate policy of those years, it would follow that malinvestment was not an issue, thereby bolstering any case built on those numbers: namely, that increased levels of investment were an effect rather than a cause of Reagan’s recovery.

    Also, we disagreed about the levels of inflation in the source you sent me to, so I got more specific in comment 17, and I’ve yet to see your reply.

    So I’m back to what I said in comment 22–let me reiterate and expand on it: sure, I may be wrong, but I haven’t been shown any evidence in this thread that I am.

    Comment by rt — May 5, 2012 @ 12:37 am - May 5, 2012

  31. Hi rt and ILC,
    I have enjoyed your exchange. Watch out, rt, being mistaken for “Cas” will not endear you to many here! I would add, that I will be interested in ILC’s reply to your point raised at #30. For ILC, I would also ask you what you think of the PPI data that the shadow inflation site uses. There is no shadow index for that (as far as I can tell–please, if I am wrong on that, I would love the link for that, if you could point me in the right direction). I was wondering why that was, since you favour the shadow CPI index. When you look at core PPI, it doesn’t bear the level of inflation to the shadow CPI that you feel is a better measure of inflation. I was wondering why you think that is, given the PPI should be much higher than it currently is (and ovr the period in question), if the shadow CPI is correct. Adding food and energy still doesn’t do it for you, so, again, what is going on?

    Comment by Cas — May 5, 2012 @ 2:08 am - May 5, 2012

  32. Our crisis today is caused by these problems:

    1) Too much debt.
    2) Too much government.
    3) Too low interest rates.
    4) Too many bailouts. (I include ALL forms of welfare or government “assistance” here along with TARP, etc.)

    I’ve spoken with several experienced professional money-managers who are firmly-convinced that the official “unofficial” economic-policy is to allow…and even encourage… massive long-term inflation like that of the Ford and Carter Admin.-era reducing the nominal-value of the US Dollar to at-least 20-to 25-cents-on-the-current dollar in order to pay-off the massive Federal and State bond and pension debts without technically and legally “defaulting” over the next 10-15 years.

    And this will include public pensions and Social Security. TPTB are anticipating getting away-with defusing public-agitation (and the threat of litigation) by blandly claiming, “What? …You got back every penny you put-in.” The same will be true of the Chinese and overseas debts.

    Plus the Federal Govt. will be able to collect massive “paper-gains” in capital-gains against currently-held stocks, bonds and the eventually-recovered real estate market created by their debasement of the currency.

    This is one of the reasons that hedge-funds and fiduciary-trust managers are buying massive acreages of Midwestern farm land…not gold.

    Comment by Ted B. (Charging Rhino) — May 6, 2012 @ 6:52 am - May 6, 2012

  33. ILC, it’s not that I don’t acknowledge the concept of malinvestment.

    Good, and I’ll talk about it some more.

    Have you ever taken a Finance 101 class? It’s amazing how many economically-trained people have NOT. And it’s amazing what you can learn there. Same with Accounting 101. I had to explain to Cas one time that your checking account appears on the bank’s balance sheet as a liability, and thus represents a loan from you to the bank (and the terms of the loan are simply that the bank must repay it on your demand, e.g., when you write a check). It would have been easier, if she had bothered to acquire some business background. But I digress. Getting back to Finance 101…

    In Chapter 4 (Time Value of Money) and Chapter 5 (Cost of Money – Interest Rates), we learn that when interest rates are higher, a lot of business projects are no longer justified under Net Present Value (NPV) calculations. The higher interest rate decreases their NPV. Which means: businesses spend money only on their most productive projects. The project’s productivity isn’t guaranteed of course; but the business only spends if the justification is strong enough to survive an NPV calucation under a high r. Likewise, when interest rates are lower, businesses spend more on their marginal projects; projects that can appear to squeak out a bit of NPV if r is low enough.

    As you point out, same is true with consumers and government, on the consumption side. But I’m focusing on the investment side for a moment. And remember: these projects are financed by some form of borrowing. The financing may be equity rather than literal borrowing, but just the same: at some point, somewhere in the economy, someone has lent savings, or in other words, created debt.

    This is one of the dividing lines between Keynesianism and reality. The fact that marginal (or B.S.) projects are not being financed and undertaken, under high interest rates, is often ECONOMICALLY HELPFUL. It helps keep prices down (the spending for good projects is not crowded out by the spending for bad projects). It helps keep people focused on real productivity – on what is real. It helps reduce, or avoid, the accumulation of debt. As the economy creates jobs, the jobs it creates are more likely to be tied to genuinely productive projects and hence, economically sustainable.

    Conversely, when interest rates are low (or zero-to-negative in real terms, as right now) and a lot of marginal or B.S. projects are being financed and understaken, that is a bad thing. The economy can’t recover, or at least not very robustly, under those conditions. Spending on good projects is at least partly crowded out by all the extra spending on bad projects (think of, say, higher demand/prices for commodities, for specialized labor, etc.). Bad debts, bad projects and bad companies are not cleared out; instead, they are enshrined and enlarged, and you have a Japan-style “zombie economy” AT BEST. (There are some special reasons why Japan has not done a lot worse, that I don’t have time to go into now – and Japan may still do a lot worse, as we are going to.) Many, or most, of the jobs that are created are not economically sustainable.

    Remember, the accumulation of bad debt and bad investment is the reason that the economy entered a recession in the first place. “We cannot solve our problems with the same thinking we used when we created them.” Recession, like surgery or fever, is the painful first step of the healing process: the time when people get real and clear the decks of their bad investment choices.

    But Keynesianism turns all that on its head (i.e., is 100% wrong). With its misplaced focus on spending levels, it gets people to think that spending is “the economy”, and that if the economy is not doing well, we must get spending higher. No, no, no. Those are the policies that gave us the bubble economy and the boom-bust cycle, to begin with. They’re the opposite of what we should be doing. Depending on the situation, high spending levels may reflect actual harm being done to the economy. Depending on the situation, lower spending may be part of a major improvement to the real economy, that is, the economy of financially sustainable jobs where people actually produce things (unlike government bureaucrats). But Keynesians, neo-Keynesians, and neo-Chartalists (so-called “MMT” people) don’t know any of that. Exhibit A: Cas.

    you haven’t established that malinvestment in 1981-1983 is a relevant factor

    The malinvestments weren’t in 1981-83. They were in the years and decades prior. They were being cleared out in 1980-82. The cleaning-out of malinvestment is *what* a recession is – or would be, if only the government would stop trying to “stimulate” to protect its friends from the consequences of their own business incompetence.

    In fact, since you’ve praised the interest rate policy of those years, it would follow that malinvestment was not an issue

    Again, not comprehending what I said. The malinvestments were largely under the “stimulative” Fed policies (i.e., the negative real interest rates) of the 1970s. Positive real interest rates (which in the context of 1980-82, meant 20% rates) is the clearing-out part of the cycle, which lays the foundation for a genuine recovery to follow. You might say that the Reagan recovery was a classic *Austrian* (not Keynesian) recovery.

    By the way, did you know that in 2002, Paul Krugman explicitly advocated that Greenspan should send America into a housing bubble?

    To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

    Quoting someone else’s words – but in a way that makes them his own. And the rest, as they say, is history. “Thanks”, Krugman.

    I got more specific in comment 17, and I’ve yet to see your reply

    I let things drop, when I see no point in continuing them. The chart in question shows inflation (1980 calculation) running over 10%, which is over anything in the period 1983-2005, which makes Bruce’s statement “since at least the 1990s” essentially correct. If you can’t see that, well obviously I can’t make you… time to drop it.

    Comment by ILoveCapitalism — May 6, 2012 @ 1:19 pm - May 6, 2012

  34. (P.S. And I did already note, and have no problem noting again, the way in which Bruce’s statement was incorrect: inflation did spike around 2007-8.)

    Comment by ILoveCapitalism — May 6, 2012 @ 1:28 pm - May 6, 2012

  35. (And that Bruce may be forgiven overlooking it, because of the trough that followed soon in 2009.)

    the official “unofficial” economic-policy is to allow…and even encourage… massive long-term inflation like that of the Ford and Carter Admin.-era reducing the nominal-value of the US Dollar to at-least 20-to 25-cents-on-the-current dollar in order to pay-off the massive Federal and State bond and pension debts without technically and legally “defaulting” over the next 10-15 years. And this will include public pensions and Social Security.

    Ted, exactly. I would say they’ve already been carrying out that policy.

    And I believe that they re-engineered the CPI over the years to understate inflation, precisely to deal with the SS/pension issue among other things. I don’t allege a specific conspiracy, but there doesn’t have to be one; it can be a kind of “natural selection”. The bureaucrat has to justify his next promotion; he justifies it by proposing changes (or why the old way is bad); and magically, the bureaucrat just above him somehow always picks (or allows) the change that favors the government over time. And many Americans let them get away with it, because they live in a fantasy world anyway (“My pension lets me retire at 47 – and I deserve it!”) and they would rather be lied to.

    Comment by ILoveCapitalism — May 6, 2012 @ 1:40 pm - May 6, 2012

  36. Actually, ILC, I’ve written finance courses, both for universities and for businesses. Basic courses, to be sure, but they covered NPV: one segment had students evaluate two proposals: one in which a firm built a new facility (high immediate costs but low operating costs in the future) vs. updating an existing facility (low immediate costs but higher operating costs). Students had to examine the impact on the Balance Sheet, the Income Statement, and the Cash Flow Statement — and of course, they had to present a Net Present Value analysis, identifying the point at which interest rates favored one alternative over another.

    But I guess it is time to drop it, ILC. I don’t know why you’re discounting the years 2005 to 2008 in your inflation analysis, and I still haven’t seen any explanation of why a recovery supposedly led by investment would coincide with higher investment levels lagging the recovery, especially since you approve of the interest rate policies of those years.

    And conversely, you can’t see why I can’t see what you see.

    Still, it’s been a fun and useful exchange. I hope you think so too. :)

    Comment by rt — May 6, 2012 @ 1:40 pm - May 6, 2012

  37. I still haven’t seen any explanation of why a recovery supposedly led by investment would coincide with higher investment levels lagging the recovery

    You haven’t -seen- any explanation? Then you haven’t seen anything I’ve said. Comments #18, #33 explain that the *level* of so-called investment spending is irrelevant. And why. Bringing it back to today’s situation, you can goose nominal investment spending – or for that matter, consumption spending – to 10 times present levels with real interest rates of negative fifty percent, and not only will it not help the economy even a bit, it will make things much worse. I’ve explained why. But if you’re not even -seeing- it, well then, I guess I’ve written for others.

    BTW, David Einhorn’s way of saying it – long, but features Simpsons characters: http://www.zerohedge.com/news/david-einhorn-explains-why-only-gold-antidote-feds-destructive-jelly-donut-policy

    Comment by ILoveCapitalism — May 6, 2012 @ 2:10 pm - May 6, 2012

  38. Exactly, ILC — you’ve provided an explanation of why malinvestment makes the level of investment spending irrelevant in today’s period — not why it’s irrelevant in the period under discussion, with its very different interest rate policy. I believe you’re pushing the malinvestment concept further than the data from those years of higher interest rates will allow you to go.

    Basically, you think I’m holding on to data that is invalidated by your theory, and I think you’re holding on to theory that’s invalidated by the data (during that period, at least), data which is exempted from your critique by other elements of your own critique.

    But you haven’t merely written for others. You’ve convince me to pay more to attention to malinvestment and malconsumption issues in the more recent past, and I’ll take them more rigorously into account as I ponder our present circumstances.

    Finally, I’ll ask you a favor. You’ve said in comment 20 that the quality of investment is hard to measure. I do understand that some schools of conservative economics (Austrians in particular) emphasize a priori analysis over a statistical approach, but I’d be surprised if there haven’t been some solid and good-faith attempts to measure malinvestment quantitatively. If you encounter them, let me know, and I promise to do the same.

    Comment by rt — May 6, 2012 @ 2:24 pm - May 6, 2012

  39. ILC, let me offer this, as a chance for you to correct my understanding of your point (if it needs correction): The malinvestment/interest rate/investment-led-recovery approach would suggest to me this sequence:

    1. Artificially low interest rates lead to high levels of (mal)investment and consumption.

    2. When interest rates are allowed to increase to market-appropriate levels, consumption falls (as consumer borrow less) and the total level of investment falls, as malinvestment is “cleared out” (as you put it in 33) and malinvestment plans are cancelled.

    3. This leads to a temporary decrease in investment during the adjustment period, a “hangover” if you will, following the malinvestment binge.

    4. Once the malinvestment is done being cleared out, and the malinvestment plans are cancelled, this frees up capital for an investment recovery: as malinvestment is as low as in Stage 3, but productive investment increases — in other words, Stage 4 shows an increase investment to levels above that in Stages 2 and 3 (though perhaps not over that in Stage 1).

    5. This then leads to an increase in GDP

    But that’s not what the data show. We DO see a U-shaped investment curve (a drop followed by an increase) but the timing relative to GDP is off — ie, investment lags where it should lead.

    Comment by rt — May 6, 2012 @ 2:44 pm - May 6, 2012

  40. 1. yes
    2. It’s not just that future poor investment plans are cancelled, it’s that existing bad investments (from the previous years of stimulus) are liquidated.
    3. Sure, why not.
    4. Again, it’s not the level of investment, it’s the quality. You seem to have it fixed in your mind that “the economy” equals spending levels.
    5. Not necessarily, and not that it should matter. GDP is ultimately just a measure of spending. The use of the GDP statistic biases thinking/discussion toward spending terms, a form of circular reasoning. Since GDP ultimately just measures spending, then naturally when it falls, the suggested solution is “We need more spending!!!1!” Nuh-uh. This may be the revolutionary point, that you can’t quite wrap your mind around: spending levels don’t matter, beyond the short run. “The economy” is production and trade. Money is just a vehicle for trade. The value of money is determined by the goods available for purchase, i.e., the goods produced. If far less oil were suddenly produced, then it would be $1000/barrel and gas would be $40/gallon; in other words, it is production (the quantities of good X available for money to buy) that determines the value of money in relation to good X. Relative spending levels do affect the allocation of profits and hence, which goods are produced in what quantities (does the world want more iPhones or more cattle prods?). But that’s the micro level. What determines overall production – the macro economy – is whether people are able and willing to get up in the morning and produce: in other words, whether the government is just, whether it impartially protects individual rights to life liberty and property, whether it therefore lets people start businesses if they want to, whether it lets people keep what they earn, whether it permits a return on capital (nonzero interest rates), etc. People use money as a mere tool for trade, in other words, people will ultimately adjust macro P(rice) and V(elocity) to match what they are collectively willing and able to produce, or even discard the government-sponsored money and invent their own, if they feel the government-sponsored money is failing them. (Note: The linked article states incorrectly that the Greeks are “bartering”. They’re not bartering; rather, they are inventing and using a new form of money, that the government won’t be able to tax, at least initially.) There is an exception in the short run, having to do with Money Illusion. When money is being redirected and/or debased by government intervention, people don’t all realize it instantaneously. If money and prices have been stable for a long time, people will begin to “believe” in money’s value, and government-directed changes in spending can then have some effect on people’s behavior. This is what happens in a “stimulus”-induced boom: By the various “stimulus” policies (fiscal and/or monetary), the government sends a giant false signal across the economy to all entrepreneurs, that each is facing higher demand than she thought, can obtain easier financing than she thought, etc. And so, roughly speaking, they all over-invest or over-expand their businesses. That’s the boom. It’s fun while it lasts. But what’s happening in real terms is the consumption of capital – that is, net destruction of real capital. It may be that, after all this spending, everyone is suddenly looking at higher commodity (e.g., energy) prices and suddenly, their money-denominated capital is worth less; it has less buying power than they thought, which means people suddenly see that they have less real capital than they thought. At that point, Money Illusion wears off some, and the short-run, sugar-high boom turns to the inevitable hangover: the bust. This is the Austrian School theory of the business cycle. (And the truth.) And then you get people like Krugman saying, well then, we need more sugar – Another bubble (see end of comment #33). Fine, but that road ends in a hyperinflationary depression, a la Argentina or Zimbabwe. But getting back to GDP: a more interesting and honest measure of economic progress might be GDP **net of new debt**. So-called “stimulus” policies are really pro-debt policies. If I borrow $50,000 and count it as income and spend it merrily, saying “Look how high my income is!”, am I being real? Have I actually gotten wealthier? Of course not. But that’s how GDP works. We borrow and spend scads of money and say “Look, GDP has risen!” That is why GDP is an irrelevancy, if not a lie. It would be more relevant and honest to look at an income statistic that can’t be pumped up by mere borrow-and-spend, and hence, that does not (in itself) encourage policies of borrow-and-spend.

    Comment by ILoveCapitalism — May 7, 2012 @ 12:01 am - May 7, 2012

  41. (continued) Bottom line: I don’t care what GDP does. I care what GDP does **net of new debt**. In the last couple years, our “stimulus” has consisted of $1.5 trillion annual deficits (or roughly comparable additions to M0, the base money supply, if you prefer to track the Fed side of it) and nominal GDP has risen by less than that, each year. In other words, with our zombie economy still clogged by malinvestment, and Obama’s war on production and trade making things that much worse, the GDP multiplier is LESS THAN ONE. For each dollar of government deficit (i.e. new public debt), we’re now actually getting less than one dollar of nominal GDP increase! And, since real GDP is calculated essentially by taking nominal GDP and discounting it by an inflation factor that I believe to be systematically under-estimated, it’s possible that we’re getting little or no real GDP increase for all this new debt and “stimulus”; it’s possible that real GDP has been stagnant or even slightly declining, and that that is the direct explanation of the lack of new jobs.

    Comment by ILoveCapitalism — May 7, 2012 @ 12:16 am - May 7, 2012

  42. Just to reflect on this a bit more:

    in a “stimulus”-induced boom: By the various “stimulus” policies (fiscal and/or monetary), the government sends a giant false signal across the economy to all entrepreneurs, that each is facing higher demand than she thought, can obtain easier financing than she thought, etc. And so, roughly speaking, they all over-invest or over-expand their businesses.

    I’m not sure, but I may have just said that a boom/recovery led by investment spending is, if anything, likely to be a false one. That the boom/recovery is *not* led by investment spending may, depending on the situation, be a good sign: a sign that it’s not being led by malinvestment. I’m not sure. I’m thinking right now of China, whose economy is based on government-forced over-investment and production for export (rather than domestic consumption).

    Consumption isn’t wrong. Investment isn’t wrong. Debt isn’t wrong. Spending isn’t wrong. What’s wrong is a government that forces excesses or imbalances in any of those things, sending false signals across the economy for years or decades in the name of stimulating them. In the U.S., we’ve taken on a massive debt overhang, that we blew basically on consumption (I don’t see houses as investments), and consumption-related businesses and jobs. In China, they’ve taken on a debt overhang in service of over-investment. China will also have to adjust, that is, China will sooner or later have to liquidate a ton of malinvestment. The difference is that, like Japan until recently, they produce goods that the world wants and so run a trade surplus, and have the foreign exchange reserves to show for it. So their adjustment will be painful, but ultimately not as bad as the one facing the U.S.

    And I’m done for the night.

    Comment by ILoveCapitalism — May 7, 2012 @ 1:06 am - May 7, 2012

  43. [...] GayPatriot This entry was posted in Economics, jobs, political economy, politics and tagged economics, jobs, [...]

    Pingback by Unemployment and Unemployment | A Plebe's Site — May 7, 2012 @ 8:10 am - May 7, 2012

  44. ILC, for analytical purposes, is there an alternative quantitative measure of economic activity in a nation that you would suggest?

    Comment by rt — May 7, 2012 @ 9:19 pm - May 7, 2012

  45. As already stated: GDP net of new debt.

    GDP is supposed to measure national income. But it counts money that is only borrowed-and-spent. Individuals are not allowed to count money that they borrow, as income. If the statistical method forces it to be counted, then it should be subtracted.

    There may be another measure that is better, “GDP net of new debt” is just the slight improvement (over plain GDP) that comes to mind right now.

    Comment by ILoveCapitalism — May 7, 2012 @ 10:17 pm - May 7, 2012

  46. P.S. And please note that if you look at the Reagan recovery based on “GDP net of new debt”, indeed it is NOT as strong as it appears from GDP alone. It is still much stronger than Obama’s, enough that Obama ought to learn something from it (and won’t). But I noted, way back at #11, that the Reagan deficit:

    was admittedly a[n economic] problem; the economy would have done that much better, if Reagan (or actually, the Democratic Congress – not Reagan) had not done that.

    I.e., had not run large deficits; or to say it positively, “if the Congress had let Reagan’s original spending cuts stand.”

    My views form a coherent whole.

    In sum, my view of 1980-82 is this:
    - It liquidated a lot of malinvestment from earlier years. There were businesses failures, and that was good.
    - The Reagan-Volcker policies also made the dollar a somewhat sounder currency, and gave people positive reasons to innovate, save, work and invest more.
    - I can see where the words “invest more” throw you off. I don’t mean the quantity. I mean the quality (or intelligence or productivity) of investment. One should expect the raw quantity of investment to be lower under a regime of high interest rates – and the productivity or the job-creating power of it to be higher. And indeed it was.
    - Result: A roaring recovery that created a lot of productive jobs, the kind of thing that Obama’s policies cannot produce, because they are the opposite policies.

    Comment by ILoveCapitalism — May 8, 2012 @ 10:44 am - May 8, 2012

  47. And to sum up about interest rates:

    - Negative real rates harm the economy because they encourage people to consume or otherwise waste capital. They literally destroy the return on capital (making it negative). Then physical capital (tools, machines, factories, etc.) decays, as people are discouraged from maintaining it. And financial capital is re-allocated, whether directly or via inflation, away from productive uses (the financing of productive business operations), and toward unproductive uses (consumption loans, government spending, the maintenance of “zombie” businesses and banks, increased financial speculation, etc.).

    - Positive real interest rates do the opposite. They help the economy greatly, because they encourage people to form and deploy *productive* capital. The raw investment spending statistics may fall, but I don’t care about that and neither should you: unproductive spending that Obama or the local business fraud labels “investment” does nothing to create jobs, as we see proven in America today.

    Comment by ILoveCapitalism — May 8, 2012 @ 11:07 am - May 8, 2012

  48. Hi ILC,
    I won’t address much of your analysis (as I have done so before), though I am interested in two things: As I asked earlier in this thread, I would be interested in your take on why the PPI does not appear to have the same movement in inflation as the shadow CPI does (or is there a shadow PPI?). Second, if you are interested in GDP, net of new debt, that would imply, as a corollary, that when we have federal government budget surpluses, we have higher than reported GDP, according to your model, right?

    Comment by Cas — May 8, 2012 @ 4:18 pm - May 8, 2012

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